In a action window rotate the bicep bone up, as in your example, then right click bicep bone and chose new smart skin...you'll now be in muscle mode where you can clean up the deformed mesh in the shoulder. Important to remember to save model and then click 'off' the handcuff icon at the upper right corner before trying out your smart skin. You'll need to clean up the shoulder at different angles of rotation so remember to advance the frame counter number to avoid over writing your previous smart skin.
David